Why Study Imperfect Competition?

This course weds business strategy with the principles of microeconomics. It offers valuable a powerful toolbox together with cases and lessons across all major functions of business, management, from finance, operations management, and marketing to human resource management, organizational behavior, statistics, and, of course, business strategy.

教学方

Dr. Peter Navarro

Professor

脚本

[MUSIC] Mr. Zebra, how would you define competition? >> Competition is when everyone tries to get to monopoly. >> What is a monopoly? >> You shall certainly find out in this lesson. >> Hi, Professor Navarro here, once again. And in this lesson, we are going to travel to the opposite pole of perfect competition and visit with the market structure of monopoly. And a related form of imperfect competition called monopolistic competition. Perhaps not surprisingly, you'll see that monopolists generally charge higher prices and produce less for the market than we would get under perfect competition. However, we will also see that this is not always a bad thing. Indeed, the benefits of at least some monopolies range from the exploitation of economies of scale, to the acceleration of technological change to stimulate higher rates of long-term growth. [NOISE] The broader point of this lesson will be this. If you understand how imperfectly competitive markets work, you will understand a whole lot better how the economies of industrialized nations function. And why they sometimes function very well, but sometimes function very poorly. [MUSIC] In fact, various forms of monopoly have been with us throughout history. And nowhere has this been more true in a country which prides itself on its capitalistic roots, The United States of America. In fact, between 1870 and 1914, the so-called Gilded Age of America, monopolists pretty much ran amok. In this era, legendary and often unscrupulous figures like John D Rockefeller, Jay Gould, Cornelius Vanderbilt, Andrew Carnegie, J.P. Morgan were able to corner the markets in everything from oil and steel and railroads, to kerosene, sugar and salt. And no one epitomized the Gilded Age monopolists better than Rockefeller, who saw visions and riches in the fledging oil industry and began to organize oil refineries. Using a combination of shrewd management, secret deals with the railroads, and an utter ruthlessness in crushing his competitors, Rockefeller was able to gain control of fully 95% of all the pipelines and refineries in America. After which, of course, he promptly raised prices. [NOISE] Rockefeller didn't stopped there, however. He devised an ingenious new device to maintain control, the so-called trust. In Rockefeller's monopolist version of a trust, shareholders turn their share over to trustees who would then maximize the profits by managing the industry. In effect, these trusts were essentially cartels, and here's your first key definition. A cartel is simply an organization of independent firms producing similar products that work together to raise prices and restrict output. And note here that the emphasis is on working together to set prices. In fact, Rockefeller's trust device worked so well that other industries soon imitated Rockefeller's Standard Oil trust to consolidate their monopoly powe. And price gouge consumers across a large spectrum of goods and services. [NOISE] The result was a massive political backlash and the passage of some of the most sweeping antitrust laws the world has ever seen. These included the landmark Sherman Antitrust Act in 1890. And you can see in this quotation from a decision by the US Supreme Court, the economic roots of antitrust laws in the notion of a market failure due to imperfect competition. Said the Court in Spectrum Sports, Inc v McQuillan in 1993, the purpose of the Sherman Act is not to protect businesses from the working of the market. It is to protect the public from the failure of the market. The law directs itself not against conduct which is competitive, but against conduct which unfairly tends to destroy competition itself. Today, the unregulated monopolies of centuries past in America are rare. But they still persist in many countries around the world. The most famous, for example, is the DeBeers diamond cartel, which controls the majority of the diamond mines in South Africa, Namibia and Botswana. And up until the 1980s, virtually ruled the diamond market. Still another company which is able to exert significant monopoly power is the agribusiness giant Monsanto. It controls a sizeable share of the seed market. And it has been able to tighten its control through the use of patented genetically modified seeds. Finally, it is well-worth noting that while cartels are illegal in most industrialized countries, the biggest cartel on the planet is OPEC, which stands for the Organization of Petroleum Exporting Countries. And more about cartels and OPEC later. For now, take a breather and then on to module two. [MUSIC]